Beware Greeks receiving gifts
The eyes of the world – the financial world, at least – remain focused on Greece and the crisis that has enveloped that country. Goldman Sachs noted on Tuesday that it’s proprietary software used to track the number of references to specific topics in all the stories carried by Reuters found that 4% of all the sentences in Reuters’ output last week (Feb 1-5) contained the word Greece or Greek. That’s a hot topic, by any standard.
Nevertheless, the markets calmed down this week, as everyone waited for the ‘informal gathering’ of European Union leaders in Brussels scheduled for Thursday. There was a near-unanimity that the EU leadership would make clear that it would not allow Greece to default, but the big question was what kind of support would be offered to Greece, and on what terms.
As noted here two weeks ago, the EU and, even more so, the European Monetary Union (EMU), do not have clear decision-making nodes. This makes them function especially poorly in times of crisis, when there is a need for tough decisions to be made quickly, by somebody. How deeply-entrenched this approach is can be seen from the organization’s latest constitutional and political development — initiated only a few months ago – of a President appointed for a multi-year term, instead of rotating from one country’s head of state or government to another’s every six months. The object was to improve functionality and decision-making, but the appointment to the posts of a minor politician whom virtually no-one had ever heard of, meant that nothing substantive changed.
In the absence of institutions and persons with the legal authority and personal/ political clout to impose their will, the golden rule comes into play by default. The golden rule says that the guy with the gold makes the rules and, in the case of the EU, that means Germany and its allies (Holland, Austria, usually Belgium as well), after thorough consultation with France. That’s how Europe has been run for the last sixty years (it’s such an improvement over going to war and destroying the continent) and that’s how it has been this time as well.
However, the Greek crisis has created a massive dilemma for Germany, France and the well-off, well-run European countries. Even if they would very much like to leave Greece out in the cold, to go bust or find its own way to straighten out its messy finances they can’t. Bankruptcy is a non-starter, not just because the EU treaties don’t relate to it directly, but more because if Greece goes bust there will be massive ramifications which go far beyond Greece. Other EU countries, notably Portugal, Spain and Italy, also have big budget problems – and if Greece defaults, the speculators will move directly to attack the next domino in line. Thus the entire project of monetary union will be placed in danger.
Worse, the enormous Greek debt which is causing the country to go bust – in excess of 254 billion euro, or five times the amount Russia owed in 1998, when it defaulted – is largely held by other European countries. French banks have an estimated $80bn of Greek assets on their books, and Switzerland a similar amount. German banks have ‘only’ $40bn, but that’s enough to blow some of them out of the water, in their already weakened state. In other words, a Greek default means a renewed global banking crisis – not what anyone needs right now.
The impossibility of allowing Greece to default is in fact the Greek government’s strongest card. What the Germans have been trying to do for the last several weeks — with all the financial analysts rooting for them – has been to try and generate enough pressure on the Greek government to force it to commit to announcing and actually implementing the very tough measures that are needed. Since these will inevitably lead to a significant drop in the standard of living of Greek citizens, the government – newly-elected on a mandate to increase state spending, not slash it across the board — is understandably loth to go that route. The Greek public is even less keen, and the unions have already begun striking and demonstrating.
Typically, the word to emerge from Brussels was ‘fudge’. “All euro area members must conduct sound national policies in line with the agreed rules”, proclaimed the Heads of State and Government of the European Union. Therefore, “we fully support the efforts of the Greek government and their commitment to do whatever is necessary, including additional measures”, etc. etc. The bottom line – we demand that the Greeks get serious and stand by their commitments to us. Or else – what? That’s not clear. Promises to “closely monitor the implementation” of previous EU recommendations and vague references to the IMF are some kind of threat. Will they work? In line with best EU practice, we’ll have to wait and see.